Note: the version here is the original unedited version, not the published one.

The economic and political turmoil created by the Arab Spring and the eurozone crisis has created some clear winners in the world of private banking over the past year, but also some clear losers. Local banks have been steadily ceding ground to their international rivals as the region’s wealthy turn to more complex international investments to shelter from the roiling markets.

The trend is apparent in most areas of private banking and in most countries, but it is particularly notable among the region’s richest customers. When it comes to providing banking services to the ultra high net worth customers, who have more than $30 million in assets, there are no local banks in the top ten.

Overall, the clear leaders among the international banks are HSBC and the Swiss banks Credit Suisse and UBS. They fill the top three places, as they did last year, albeit with HSBC now overtaking Credit Suisse for top spot. US banks also make a strong showing and there is a healthy number of other banks from the UK, France and Germany.

According to Rory Gilbert, head of international private banking for the MENA region at Barclays Wealth, the reason why international banks have been doing so well is because of their global reach. They appear to be benefitting from the changing demands of private banking clients in the region, spurred on by the geopolitical and economic events of recent years.

“It’s clear that if you’re a wealthy entrepreneur or individual in a jurisdiction where uncertainty has reared its head, then one of the things you’ll be thinking of is how do you secure your assets, how do you make sure your family is taken care of and that your interests are properly organised,” he says.

“People have begun to consider a whole new dimension of risk and that has lead them to consider ways they should mitigate some of the potential exposure they have. Clients are looking to put assets into different jurisdictions, not necessarily because of political risk but because they just feel more comfortable having exposure to, say Singapore, rather than a eurozone centre. That builds in favour of international banks.”

Nonetheless, some local banks have managed to maintain a strong presence. Two Saudi banks, Samba and National Commercial Bank (NCB), are in the top ten overall and Bahrain’s Ahli United Bank is in eighth place in its home market and in Kuwait. National Bank of Kuwait and Gulf Bank both also make the top ten for their home market.

However, in the rankings for Egypt and the UAE, there are no local banks in the top ten. Gary Dugan, chief investment officer for the private banking division of Dubai-based Emirates NBD, says that part of the reason that regional banks have struggled is due to the changes in interest rates over the past year. As they declined, so the attractiveness of keeping money in local banks has fallen too.

“Local banks benefitted when the interest rates were very high in previous years,” he says. “A lot of money was parked in cash and quite a few local banks would offer only limited options in international investments. We’re different because we offer 1,100 mutual funds on our platform and we deal with 49 global stock markets, but I can imagine that the local banks in aggregate wouldn’t offer all the options of international banks.”

The continued, relatively high level of interest rates in Lebanon is helping local banks there maintain their market position (see separate feature). In other parts of the region, however, the combination of low interest rates and inflation of 4 to 6 per cent in most countries means that simply leaving cash on deposit is an unattractive option.

That is likely to keep the pressure on local private banks in the near term, and senior figures in the industry say they expect conditions to remain challenging.

“Private banking and wealth management has a historic reputation for being an attractive yet very competitive sector, but since at least 2009 it has become highly challenging as well,” says Sawsan Abulhassan, deputy group chief executive officer for private banking and wealth management at Ahli United Bank.

“Our modus operandi for this year is that the political upheaval that marked 2011 will continue to be with us for some time and thus we expect investors to keep their time horizons short to medium and further rein in durations on risk assets. Both risk and risk awareness are high and the investment environment is very challenging as markets continue to be uncertain and volatile. We believe this will affect the geography of wealth placement globally.”

All the banks, whether international or local, are having to come to terms with the changing risk appetite among the region’s wealthy, and not just when it comes to their home markets. The ongoing problems in Europe and, to a lesser extent, the US are also having an impact and, in general, private banking clients have been acting more cautiously over the past year.

“This is the first time in a generation that investors have had to really question whether the Western powerhouses of stable and predictable economic growth are going to falter,” says Gilbert. “In the past there’s always been confidence that, for example, the US consumer will come in and pick up the slack, or that Germany is a massive exporting economy and a great way of getting exposure to the high technology, industrial base in Europe.

“The eurozone problems are causing people to really take stock of where they want to be exposed to and what risks they are prepared to bear. We’re seeing a lot of people expressing much more of an interest of getting exposure to Asia. Many clients now recognises, for example, that the BRIC countries represent a chance to get exposure to growth and in this region there is a natural bias to getting exposure to Asia, to India and China, and to look at opportunities there.”

The good news for all the banks, however, is that the pool of potential clients has been growing despite the difficult conditions. Ledbury Research, a London-based firm which specialises in documenting the habits of the world’s richest citizens, estimates that the number of deca-millionaires – those worth more than $10 million – has grown sharply over the past few years.

“The wealth landscape is changing dramatically around the world, as assets and those that service them adjust to new hubs of wealth generation,” says James Lawson, a director at the firm. “In terms of domestic wealth, though they have not come through the past couple of years unscathed, it is a fast-growing region. Ledbury’s estimates of the number of deca-millionaires in the region has grown from a low of 23,000 in 2009 to 31,000 by the end of 2011. That’s 35 per cent growth in just two years.”

The nature of their investments has been shifting in response to the economic conditions. Risk appetite remains lower than before the wave of crises began in 2008 and fixed income products, including conventional and sharia-compliant bonds, remain popular, as does gold. But there have been signs that some investors are starting to regain their confidence.

“We witnessed allocations shift from equities to cash and fixed income immediately post 2008,” says Tamer Rashad, Head of Middle East at Merrill Lynch Wealth Management. “In 2010 and 2011 there were signs of return to higher equity allocations. I don’t see the risk appetite yet returning to pre-2008 levels in terms of private equity and hedge funds, but there is a healthy return into equities and we think that will continue.”

Real estate also remains an important area for the region’s wealthiest citizens, despite the turmoil in that sector in recent years.

“The market has benefitted from at least some stabilisation if not improvement in certain pockets of the residential property market which has helped individuals who have a large property exposure to feel a bit more comfortable about life,” says Dugan. “The risk appetite has certainly increased, but it’s patchy. We’ve seen a little bit more appetite for quite chunky investments in real estate globally. We’re having a reasonably dialogue about direct investments and private equity, for the first time in quite a while. And we are seeing a bit more appetite for people to go back into emerging markets at the moment.”

Whether the local banks can tap into this changing and growing market and reverse the trend of the past year remains to be seen, but they have at least been trying to adapt to the increasingly competitive landscape.

“The international banks have historically had an advantage because of their critical mass, which enabled them to build a really broad offering of services and investment opportunities for their clients,” says Mathieu Vasseux, partner and head of the Dubai office of management consultancy Oliver Wyman. “That structural advantage is very difficult to challenge, but some of the local players are recognising that wealth management is a big opportunity and they should try and get a bigger slice of the pie.

“They’re building a better onshore wealth management offering. They’re trying to come up with a proposition that might not have all the bells and whistles or the most advanced investment options, but which focuses on doing the basics right and strong relationship management. They're getting smarter and they’re building a more integrated onshore value proposition which the global offshore banks cannot replicate.”

If they can roll out this new service offering successfully, then there is a chance that the local banks can reverse the trend of the past year and regain some of the ground they have lost to the major global private banks.